Bitcoin

Bitcoin is the world's first decentralized digital currency and online payment system, which allows users to conduct transactions without the need of any third party intermediary (banks for example). It is one of the cryptocurrencies.

Bitcoin, which is the name given to one unit of the virtual currency, can be divided further into subunits (similar to cents and pennies), the smallest of which is referred to as a satoshi (one hundred millionth of a bitcoin). The bitcoin protocol and reference software (free and open-source), which works on any computer or smart phone, was developed from the one that had been introduced in 2008 by pseudonymous inventor known as Satoshi Nakamoto.

The currency is secured by cryptography thereby making it impossible to duplicate. To begin using bitcoin, a user can sign-up for a free account with any of the bitcoin wallet providers (Blockchain.info and Coinbase are the popular ones). Once signed up, a unique 34-character address (a combination of letters and numbers) is assigned to the user. Alternatively, for better security, a user can download an appropriate wallet and store the bitcoins offline (so called cold storage).

All transactions between the bitcoin users are verified by network nodes and recorded in open shared ledger referred to as the block chain. A record of each transaction is shown in the log of the user as well. Thus, a transaction commences only if there is spendable balance in the wallet. The bitcoin payment system uses a seed or a private key to prevent thieves from stealing the coins from the wallets and to prevent loss or duplication of the coins in the block chain.

The process of confirming the transactions (usually begins in 10 minutes) or record-keeping service is called mining. The computers involved in such a process are called the network nodes. There is a cap of 21 million bitcoins that would be ever created (through reward for the mining process). The rate of creation halves every four years until the cap is reached.

No government or central bank has direct control. All other payment systems (Neteller, WebMoney, Skrill, PayPal, etc.) are directly influenced by the decisions of governments. The closedown of Liberty Reserve is a well-known example.

No obligatory usage fees. Fees are optional and are paid by the sending party to speed up transaction confirmation. All centralized payment systems charge a fixed percentage of the transaction value as a service commission.

Totally anonymous. Transactions through any other payment processor can be easily traced.

No identity theft. Identity verification is mostly a must for other forms of payment systems.

Conversion to fiat currencies is possible in a transparent manner through exchanges. In case of other electronic payment systems, the service operator determines the conversion rate.

Bitcoin does not face the issue of counterfeit or deliberate devaluation.

Disadvantages:

Price is highly volatile. A movement of 10% or more against the US dollar in a single day is not uncommon.

Limited supply and liquidity.

Facilitates illegal activities because of anonymity. The underground website Silk Road, taken down by FBI, is a classic example.